1984 (6) TMI 51 - SC - Central Excise

Amended definition 'related person' s.4(4)(c) valid; assessable value based on manufacturer's wholesale cash price; no bank guarantee costs

SC held the amended definition of 'related person' in s.4(4)(c) of the Act constitutionally valid, setting aside the HC's contrary view. The Court ... Applicability of the definition of 'related person' contained in clause (c) of sub-section (4) of section 4 of the Central Excises and Salt Act, 1944 as it stood after its amendment by section 2 of Central Act 22 of 1973 which came into force with effect from 1st October, 1975 - Held that:- The decision of the High Court holding that 'the concept of related person occurring in amended section 4 is ultra vires the legislative competence of Parliament under Article 246 read with Entry 84 in the Union List' and striking down clause (c) of sub-section (4) of section 4 as also the expression 'the buyer is not a related person and' in clause (a) of sub-section (1) of section 4 and proviso (iii) to that clause must consequently be set aside and it must be held that these provisions are constitutionally valid. Affirm the view taken by the High Court and hold that the assessable value of the dyes manufactured by the assessee cannot be determined with reference to the selling price charged by Atul Products Limited and Crescent Dyes and Chemicals Limited to their purchasers but must be determined on the basis of the wholesale cash price charged by the assessee to Atul Products Limited and Crescent Dyes and Chemicals Limited. The demand made by the Assistant Collector for differential duty must, therefore, be held to be rightly quashed by the High Court. Equally the assessee has no interest direct or indirect in the business of Crescent Dyes and Chemicals Limited, which is just a wholesale dealer purchasing dyes from the assessee in wholesale on principal to principal basis. It is obvious that for the same reasons which have prevailed with us while discussing the case of Atul Products Limited, the assessee has no direct or indirect interest in the business of Crescent Dyes and Chemicals Limited. The first part of the definition of related person in clause (c) of sub-section (4) of section 4 of the amended Act is, therefore, clearly not satisfied both in relation to Atul Products Limited as also in relation to Crescent Dyes and Chemicals Limited and neither of them can be said to be a 'related person' vis-a-vis the assessee within the meaning of the definition of that term in clause (c) of sub-section (4) of section 4 of the amended Act. We, therefore, affirm the view taken by the High Court and hold that the assessable value of the dyes manufactured by the assessee cannot be determined with reference to the selling price charged by Atul Products Limited and Crescent Dyes and Chemicals Limited to their purchasers but must be determined on the basis of the wholesale cash price charged by the assessee to Atul Products Limited and Crescent Dyes and Chemicals Limited. The demand made by the Assistant Collector for differential duty must, therefore, be held to be rightly quashed by the High Court. The High Court has erred in giving direction in regard to payment of the costs incurred by the assessee in connection with the bank guarantee furnished by it in pursuance of the interim order made by the High Court. We do not think the High Court was right in giving this direction. The bank guarantee was required to be furnished by the assessee as a condition of grant of interim stay of enforcement of the demand for differential duty and if it is ultimately found that the demand for differential duty was not justified, the bank guarantee would certainly have to be discharged, but it is difficult to see how the costs of furnishing the bank guarantee could be directed to be paid by the Revenue to the assessee. Issues Involved:1. Constitutionality of the definition of 'related person' under the Central Excises and Salt Act, 1944.2. Applicability of the definition of 'related person' to the assessee's transactions.3. Validity of the demand for differential duty by the Assistant Collector.4. Direction for payment of costs incurred by the assessee in connection with the bank guarantee.Detailed Analysis:1. Constitutionality of the Definition of 'Related Person':The first issue was whether the concept of 'related person' in clause (c) of sub-section (4) of section 4 of the amended Central Excises and Salt Act, 1944 was within the legislative competence of Parliament under Article 246 read with Entry 84 in the Union List. The High Court had previously ruled that this concept was outside the legislative competence of Parliament and thus unconstitutional. However, this decision was overturned by the Supreme Court, referencing the precedent set in Union of India v. Bombay Tyres International Limited, where the definition was read down to mean that 'related person' refers only to a distributor who is a relative of the assessee within the meaning of the Companies Act, 1956. Consequently, the Supreme Court held that the definition was constitutionally valid.2. Applicability of the Definition of 'Related Person':The second issue concerned whether the assessee and its wholesale buyers, Atul Products Limited and Crescent Dyes and Chemicals Limited, were 'related persons' under the first part of the definition in clause (c) of sub-section (4) of section 4. The Assistant Collector had determined that they were related, thus requiring the assessable value of the dyes to be based on the price at which these entities sold the dyes to dealers and consumers. The Supreme Court, however, found that the required mutual interest in each other's business was not present. Atul Products Limited, holding 50% of the assessee's share capital, had an interest in the assessee's business, but the assessee did not have any interest in Atul Products Limited's business. Similarly, Crescent Dyes and Chemicals Limited, which was not even a shareholder of the assessee, did not have any interest in the assessee's business, nor did the assessee have any interest in its business. Therefore, neither Atul Products Limited nor Crescent Dyes and Chemicals Limited could be considered 'related persons.'3. Validity of the Demand for Differential Duty:Given the conclusion that Atul Products Limited and Crescent Dyes and Chemicals Limited were not 'related persons,' the Supreme Court affirmed the High Court's decision that the assessable value of the dyes should be based on the wholesale cash price charged by the assessee to these entities. Consequently, the demand for differential duty by the Assistant Collector, calculated based on the selling price charged by Atul Products Limited and Crescent Dyes and Chemicals Limited, was rightly quashed by the High Court.4. Direction for Payment of Costs Incurred by the Assessee:The final issue was the High Court's direction for the Revenue to pay the costs incurred by the assessee in connection with the bank guarantee furnished pursuant to the interim order. The Supreme Court found this direction to be erroneous. The bank guarantee was a condition for the interim stay of the differential duty demand, and while the demand was ultimately found unjustified, the costs of furnishing the bank guarantee should not be borne by the Revenue. Thus, this part of the High Court's order was set aside.Conclusion:The appeal was dismissed except for the part concerning the payment of costs related to the bank guarantee. The Revenue was directed to pay the costs of the appeal to the assessee.